According to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC), there was a
rapid increase in weather related disasters worldwide between 1980–- 2003. The report estimates the
economic losses due to damage caused by natural disasters totaled USD 1 trillion during that period.
While natural disasters rose sharply worldwide over the last two decades, the hardest impacted were low income
developing countries, where over 95% of deaths occurred due to natural disasters.

Many Developing countries, particularly SIDS and LDCs, are unable to afford the economic cost of disasters due
to their difficult socio-economic situation. Impacts are often exacerbated by poor emergency response
capabilities and unsystematic disaster management programs. Socio-economic baseline trends indicate that
major challenges can already be expected in developing countries that will be exacerbated by climate
change.

The role of insurance in climate change adaptation and disaster risk reduction

Due to the rapid increase in frequency and intensity of natural disasters that have occurred in both
developing and developed countries, greater emphasis is being placed on disaster risk management
strategies. Interest is rising for designing disaster risk reduction and risk transfer tools
which facilitate adaptation to climate change.
Insurance schemes are increasingly playing a visible role as a means of providing economic security by
pooling economic risks against weather-related disasters. Insurance and other kinds of disaster
risk management can facilitate public-private partnerships for dealing with extreme weather related
calamities. Transferring risk through insurance could play a useful role in adaptation to climate
change and disaster risk management.

Forms of insurance schemes

Today,
insurance for weather-related risks is available at micro, meso, and macro levels.

A. Sovereign insurance
Sovereign insurance schemes are efforts taken by country governments or a private insurer to pool losses on a
sovereign level.

B. Micro-insuranceMicro-insurnace is a form of insurance that is aimed at
providing easier accessibility and affordability for low income households with insurance against
natural disasters.

C. Index based insurance
Many new schemes utilize parametric, or index-based, approaches which do not require indemnification
(verification of losses in order to pay an insurance claim) because a contract is written against a weather
proxy or index, such as: rainfall, sunlight or temperature. If a chosen weather proxy exceeds a certain
threshold, a payment is triggered. Parametric approaches have the potential to lower the costs of
insurance, increase coverage, and reduce moral hazard. They can be applied at the micro-, meso-, or macro
level.

Developed countries such as Japan, France, the United States, Canada, Sweden Norway and New Zealand have
established public-private national insurance systems against natural disasters. Examples
of such initiatives include the Turkish Catastrophe Insurance Pool (TCIP), which is described as a case
study below. The TCIP is modeled after the United States California Earthquake Authority, the French
and the New Zealand earthquake commission programs, which were set up to provide earthquake coverage for
homeowners and relied mainly on international reinsurance and capital markets for their risk capital
capacity.

Turkey: Turkish Catastrophe Insurance Pool (TCIP)

Organizations involved: World Bank, Government of Turkey,
private sector insurersBackground: Two years after the devastating Marmara earthquake
claimed over 18,000 lives and resulted in multi-billion economic damages, the World Bank provided
financial and technical assistance to the government of Turkey to establish the TCIP, in order to
provide reconstruction assistance for damages to houses, disaster mitigation and risk management.
The TCIP is the first national insurance pool of its kind, and involves the public and private sector
in different layers of risk coverage to help make insurance affordable in an emerging economy.Success so far: Almost 1.8 million earthquake insurance
policies have been underwritten since 2000, making the TCIP the second largest catastrophe pool in the
world, the first being the regional Caribbean Catastrophe Reinsurance Facility (CCRIF) which is
elaborated further in the chapter.Lessons learnt: In a Risk Management Workshop held in
Washington, 2005, the World Bank has highlighted some issues regarding its role in being the sole
emergency lender for the TCIP. These concerns include:

The World Bank would not be able to provide all liquidity needed to cover the affected
population in the case of a very large event;

The World Bank suggested that in the case of the 2000 Marmara earthquake, it was ill equipped to
provide instant liquidity after earthquake disaster and it took over a year for liquidy to become
available;

Reliance on the World Bank retroactive lending and emergency donor relief is unsustainable due to
frequency of catastrophes.

B. Micro-insurance

The disaster risk management community views micro-insurance as an important emerging tool for disaster
management in developing countries. This form of insurance is also viewed as a means to keep households
out of a cycle of poverty as it provides post-disaster liquidity to households and farmers. Provision
of microinsurance in developing countries has attracted the attention of international stakeholders, but
insurance coverage for this market segment worldwide is still low (but growing rapidly). Nevertheless, many
microinsurance schemes have successfully been implemented to manage weather-related risks.
For example, a scheme in Bangladesh (see below) has been providing insurance against flooding since the early
nineties. The success of the Bangladesh project was the incentive for a similar project established in
India which is known as Afat Vimo system. Details on both case studies can be found in the report,
“Micro insurance for natural disaster risk in developing countries: Benefits, limitations and
viability” produced for the IIASA in 2006.
Voluntary microinsurance schemes that have become successful in insuring clients against the risks posed by
natural disasters include: The Self-employed Women’s Association (SEWA); , the Working Women’s
Forum (WWF) in India; and the Centre for Self-Help Development (CSD) in Nepal.

Bangladesh: Proshika

Organizations involved: Proshika (NGO), the Government of BangladeshBackground: As a response to the 1988 floods in Bangladesh, which affected over 73
million people, a natural disaster management program was established, by Proshika. Proshika,
one of the largest NGOs in Bangladesh, offers a Participatory Livestock Compensation Fund (PLCF) that
targets farmers.Success so far and still on going: Since the scheme was introduced in 1991, it has
won over two million clients in over 20,000 villages and 2000 slums in 57 districts of the
country. It covers 10% of the population of Bangladesh for property insurance and 25% for life
insurance. Until 2004, 20.06million taka (Bangladeshi currency) were paid from the compensation
fund to the affected families of 4,448 deceased group members, and 20.29 million taka to 14,525
members for property losses due to cyclones, river erosion, and tornadoes.Limitations: Despite efforts being taken to try and upscale the scheme by Proshika
and the government, it still does not cover the entire population and area of Bangladesh, leaving
large areas of the country and much of the population vulnerable and uncovered by insurance.

C. Index-based insurance

Index-based insurance has been used at different scales: from small-scale farmers and herders, property
owners and small businesses to sovereignty level, by governments, for transfering their risks to the
international capital markets. Index-based insurance has proven to be one of the most popular and
promising insurance instruments to facilitate improved emergency response to weather-related
catastrophes. As of 2008 over two-dozen weather index-based insurance schemes were successfully piloted
in a number of developing countries, including Malawi, Mongolia, Peru, Mexico and in the Caribbean
countries. These case studies are presented below.

Crop index-based insurance to date has been the most popular form of insurance being utilized by both
developing and developed countries in order to assist farmers dealing with the risks posed by weather related
calamities. The World Bank and UNDP have so far been the main supporters for developing crop risk
management models as well as providing finance, technology and training for country projects. To date,
over a dozen countries most notably in Africa and Central America, have successfully implemented crop
index-based insurance. These countries include Senegal, Mauritius, South Africa, Tanzania, Peru,
Nicaragua, the Philippines, Thailand and Ukraine.
Swiss Re has also piloted projects in Kenya, Mali and Ethiopia. According to the 2007 ‘Scaling up
index insurance’ paper by the Micro Insurance Center, a number of developed countries such as the
United States of America and Canada have also developed such insurance schemes. Box 3 below presents
the case study of Malawi that has had considerable success in providing insurance to farmers against the lack
of rainfall in various parts of the country. A similar pilot project in India, BASIX, was developed in
2003 and has expanded its support from an initial umber of 230 farmers to more than 250,000 farmers.

Malawi: crop insurance

Organizations
involved: International Bank of Malawi (OIBM), Malawi Rural Finance Corporation (MRFC) and the
World BankBackground: Malawi is one of the most drought-prone countries in
Southern Africa. The livelihoods and food security of various population groups are greatly worsened by
drought.Success so far: In 2005, the
Malawian government along with technical assistance and training provided by the World Bank, introduced
an innovative pilot drought insurance scheme that was targeted at local groundnut farmers. The
pilot scheme is currently being utilized by over 900 farmers in four different areas. The scheme
has enabled them to purchase hybrid groundnut seeds, thereby increasing the productivity of
groundnuts significantly.Lessons learnt: Malawi was the
first African country to implement such index-based insurance policies which were sold to small-scale
farmers. Despite the benefits of the insurance scheme there still remain a number of
concerns. For example, the instrument presumes that all farmers use the same farming techniques
and have the same soil type when considering crop yield production. Lack of education and
knowledge about index insurance among herders remains a major challenge for the development of the
insurance scheme.

Livestock index-based insurance

This form of micro index-based agricultural insurance is targeted at herders, and provides insurance against
the loss of livestock caused by such catastrophes and extreme weather events as drought or flooding. To
date only two countries have successfully implemented the scheme. MARSABIT project is based in the arid and
semi arid areas in Northern Kenya. The livestock index based insurance in Mongolia is presented
below.

Mongolia: livestock insurance

Organizations
involved: World Bank
Background: Some 11 million animals were lost in Mongolia between 2001–2002 due to severe
winter weather (known locally in Mongolia as dzud). As a result the Mongolian government, aided
by the World Bank developed an Index-Based Livestock Insurance (IBLI). The IBLI protects
Mongolian farm herders against livestock loss due to extreme cold winter.Success so far: The pilot
project is the first attempt by a developing country to provide security against livestock losses for
farmers due to extreme climate/weather conditions.Lessons learnt: Despite the
success of the project, certain challenges remains. The index payouts reported sometimes do not
match the individual livestock loss. Another concern with the IBLI is that it does not cover the
loss of all types of livestock, which has left some herders uninsured against the loss of other
livestock. The lack of knowledge about the existing index insurance among herders remains a
challenge.

Meso-index based insurance

In meso index-based insurance schemes, payouts are made by a reinsurer either to national banks or to NGOs so
that they can respond to economic losses that might have resulted from a natural disaster. An example
of such a scheme is being implemented in Peru and is elaborated in the box below, in which the an El
Niño–Southern Oscillation (ENSO) related climate indices are used as a proxy for extreme rainfall
in Piura district. Similar projects that have been implemented in Vietnam and Mexico use different
climate indices such as sea or river level rise as a proxy to issue insurance payments.

Peru: schemes against natural disasters

Organizations involved: Microfinance institutions (MFIs)Background: Severe rains and floods associated with El Niño
are economically the most significant catastrophic risk in Peru. Extreme rainfall may cause widespread
loss to agriculture as well as to infrastructure and often cause landslides which lead to deposits of
large amount of sediments in rivers, which undermines the ability to manage droughts. El
Niño and its related climate indices are used as a proxy for extreme rainfall in one of the
districts of Peru called Piura. A strong El Niño can bring rainfall that is more than 40
times the average in Piura.
Initiation: In 2007, a private company began offering a
weather-index insurance product in the northern department of Piura. This insurance scheme was
based on the ENSO (El Niño Southern Oscillation) index that measured the sea-surface temperature
off the Peruvian coast. This index is a good predictor of extreme rainfall resulting from El
Niño events.

Macro-index based insurance

At a macro level, a government, institution or an international charity might use index insurance for a
disaster relief fund or to fund relief activities following a natural disaster as illustrated in Ethiopia,
Mexico and the Caribbean Community (CARICOM).

Mexico: Catastrophe Bond

Organizations
involved: World Bank, Inter American Development Bank.Background: The Mexican
government in 2006 insured its catastrophe reserve fund, the Fondo de Desastres Naturales (FONDEN),
against natural disasters with a mix of reinsurance and a catastrophe bond. The resulting
contract is linked to a parametric trigger in terms of magnitude and depth of seismicity for the
three-year period 2007 - 2009.In 2008, the Mexican government spent $1.2 billion from the reserve
fund to cover rescue and rebuilding operations after Hurricanes Stan and Wilma. The government is
planning to issue a similar kind of catastrophe bond for insurance against
hurricanes.Limitations: There is no
mechanism in place to ensure that the post-disaster bond payments reach those that need the payments
most. Moreover, the catastrophe bond transaction has proved to be of a very high
cost.

Caribbean Catastrophe Risk Insurance Facility (CCRIF)

Organisations involved: CARICOM (the Caribbean Community),
donors, World BankBackground: The Caribbean islands are extremely vulnerable to
natural disasters. On average, one major hurricane affects the regions every two years. The
Caribbean Catastrophe Risk Insurance Facility (CCRIF) was set up in 2007. It is considered as a
system in which a number of Caribbean countries combine emergency reserve funds into a common pool, so
that there is a regional insurance facility which will trigger payments to tackle the economic losses
caused by natural disasters. The schemes also provide easy access to affected countries to obtain
liquidity to implement both long- and short-term recovery efforts. Claimed payments are based on
parametric triggers such as wind speed. The CCRIF is the first multi-country risk pool in the
world.Success so far: In November 2007 an earthquake devastated
Dominica and St. Lucia. The CCRIF paid out approximately US$1 million to the countries to reover
their economic losses. The advantages of this scheme include efficient risk transfer mechanisms,
optimal pricing from reinsurance through risk-pooling and economies of scale, and sharing of
administrative and operational costs of the insurance business.Lessons learnt: The scheme has faced some challenges,
including:

The CCRIF policy covers a small portion of the risks retained by governments;

The CCRIF is designed as insurance against large catastrophic events, such as when
country-wide impact threatens the entire economy;

Parametrics are difficult to be designed for smaller magnitude events.

Similar projects: The World Bank is beginning the process
of implementing other regional insurance pools in Romania (to cover Eastern Europe) against harsh
winters and in the Pacific against severe weather related disasters.